Question

financing the government's support package is contentious issue. part of it is to come from reprioritisation of spending. Part from an IMF loan and part from new debt issue in the local bond market. Some have suggested that the Reserve Bank should simply print the money. Apply the augumented Phillips curve policy lesson to the suggestion that the SARB print money. Make use of graphs and explain what the impact might be on output and inflation.

Answer 1

According to the Phillips curve, there is a trade off between unemployment rate and inflation rate in the short - run, in other words an increase in inflation in the short - run will lead to a lower unemployment rate and an increase in output.

When the SARB ( South African Central Bank ) prints money to finance government's package, it would lead to an increase in money supply which in turn would lead to an increase in inflation rate in the country. According to the Phillips curve an increase in inflation rate would result in higher output and lower unemployment in the short run.